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Boeing broadens defense business to adapt to Pentagon budget shifts

One of the companies hardest hit by shifting defense priorities under Secretary Robert Gates in the fiscal 2010 budget was Boeing.

Its Integrated Defense Systems (IDS) division saw at least five major programs, among them the C-17, the F-22, the Airborne Laser System and the Future Combat Systems, axed or substantially cut. Congress subsequently restored funding for 10 more C-17s, but this program went back on the chopping block with the fiscal 2011 budget.

America’s No. 2 military contractor by defense revenue after Lockheed Martin, Boeing has shifted its business strategy accordingly. Under James Albaugh, IDS CEO until he was named chief of Boeing Commercial Airplanes (BCA), the company set a course for defense diversification with a focus on growing business in non-Cold War era systems. Dennis Muilenburg, Albaugh’s successor, continues that diversification strategy and has reorganized IDS into a new Boeing Defense, Space & Security (BDS) unit.

Boeing began its diversification with the rapid acquisition of several companies in 18 months. These included UAV manufacturer Insitu; intelligence, security and cybersecurity specialists Ravenwing, KEI and DRT; Tapestry Solutions and Federated Software Group in nonplatform services; and eXMeritus Software Federal Systems in C4ISR/cyber security.

Traditional Boeing defense platform programs include rotorcraft, mobility and tactical aircraft. “We expect to extend and grow this,” Muilenburg told AFJ. The P-8A Poseidon will be an important program, with the Navy planning to buy nearly 120 of these anti-submarine, surveillance aircraft. Boeing also sold eight variants to India and has identified potential sales for about 100 outside the U.S.

The KC-X tanker, which Boeing hopes to win in the re-compete, the V-22 Osprey (a joint venture between Boeing and Bell) and extending the lives and sales of the Chinook and Apache helicopters also fall in the platform strategy. Muilenburg also predicts continued domestic and international demand for the F/A-18 Super Hornet.

The tanker competition remains a high-stakes program. The final Request for Proposals was expected in February. Northrop Grumman threatened to pull out of the competition unless the RFP was significantly changed to include credit for the extra capabilities of its KC-30 over the smaller Boeing KC-767. (Conventional wisdom is that Boeing will offer only the KC-767 and not the conceptual KC-777 that it has touted as a potential contender; Muilenburg declined to confirm this, however.)

The initial Air Force contract is for 179 tankers. A KC-Y competition will follow at an unspecified date, then a KC-Z competition to replace the KC-10. Boeing, in 2007, said that if it lost the KC-X contract, it would be out of the tanker business for the next 40 years.

Furthermore, if Northrop Grumman and its KC-30 partner EADS win the contract, Boeing’s archrival Airbus plans to open a final assembly line in Mobile, Ala., which will be dual-use for the commercial A330 product line. The prospect of Airbus, an EADS unit, establishing a U.S. assembly line is something Boeing wishes to head off.

But Muilenburg anticipates a large international market for the tanker should Boeing win the contract. The tanker program’s importance to Boeing is reflected by the company’s move of its tanker division headquarters to Puget Sound (Seattle), where Boeing Commercial builds the airplane. Because of the well-documents problems in the International Tanker program — the Japanese tankers were late and the Italian tankers are at least four years behind schedule — Boeing’s tanker team is working with the P-8A team that produced this airplane on time for the Navy to gain “lessons learned” for the Air Force tanker contract.

Closer integration between BCA and BDS is another major goal of the company. “Going forward, we are really focused on bringing the ‘one-Boeing’ effort to the market,” Muilenburg said. “We are all very focused on making this work for a competitive advantage for Boeing. We believe we will take lessons learned from the P-8, which has really shown us how to take development of a commercial derivative to provide very affordable solution for our customer for in-line modifications. We are developing integrated commercial and defense teams for certification. We learned a tremendous amount from international tankers and P-8 to apply to KC-X.”

Network and space systems, and C4ISR systems are other areas where Boeing will focus in its drive to diversify from Cold War-era systems.

Boeing’s Virtual Fence, intended to provide security along the U.S.-Mexican border via a sophisticated array of cameras and surveillance systems, is another example of the company moving into nontraditional systems and which tap into the relatively new homeland security market. The Virtual Fence is years late, flawed and hugely over budget, however. Government officials nonetheless point to successes and say the fence is detecting illegal entries from Mexico that otherwise would not have been observed.

Boeing is also growing its services business, which was about 18 percent larger by revenue in 2009 than the previous year.

“It’s important to note that the strategy you heard previously from Jim [Albaugh] is the strategy we are continuing to execute,” Muilenburg said. “We did foresee flatness in the budget and we have repositioned to move into important adjacencies to broaden our portfolio for the future.”

Boeing has stepped up efforts to keep the C-17 platform alive. In addition to the successful efforts so far to find money in the defense budgets despite Gates putting the cargo transport on the 2010 and 2011 hit lists, BDS has upped its sales to non-U.S. customers. India has issued a Request for Information for six C-17s and the United Arab Emirates ordered six. NATO, the U.K.’s Royal Air Force and Qatar are also customers. Delays with and uncertainty over the future of the Airbus A400M resulted in some new orders for the C-17 and Muilenburg believes more may be possible. “The A400M does open up potential opportunities for us,” he said, pointing to three C-17s sold to NATO that are based in Hungary as just one example. “We have cost and schedule certainty for delivery. There are attractive prospects for international customers.”

BDS has proposed an advanced C-17 version that includes higher thrust engines and double-slotted flaps for “extreme” short-field landings, along with a centerline landing gear and a number of other systems to improve the tactical capabilities of the airplane. So far, the Air Force hasn’t expressed much interest.

Boeing believes the advanced C-17 “fills a critical theater airlift gap,” pointing to a 10-year period between 2015 when the Army will begin fielding its new modernized vehicles and when the next generation airlifter, the Joint Future Theater Lift, is scheduled to enter service. Modernized vehicles are too large to fit on a C-130 aircraft (an argument also advanced by Airbus for the A400M,) and “the Army’s new scheme of maneuver requires them to be delivered ‘combat-configured’ at multiple points on the battlefield,” Muilenburg said.

With an aging C-5A fleet, two wars and recurring humanitarian efforts — as well as support for the U.S. Antarctica station — BDS and C-17 supporters see the need for long-term orders by the Pentagon for the airplane. The C-17 comprises 60 percent of the air mobility fleet, including 80 percent of the airlift in the Afghan theater. Muilenburg adds another reason: the C-17, along with the P-8 and potentially the KC-767 tanker, are the last large airplane platforms in production in the U.S. defense system. But Boeing still has a fight on its hands that could go all the way up to the White House. Gates has said he will recommend that President Obama veto the entire 2011 defense budget if funding for the C-17 is reinserted.

Wall Street analysts are split on the outlook for Boeing. Some look at the disarray in high-profile programs such as the KC-767, the Virtual Fence, the Australian Wedgetail airborne surveillance program and the Airborne Laser and conclude Boeing’s defense unit faces trouble for the long haul.

Other analysts look at the 300-plus defense programs that are going well and Boeing’s changing strategy and conclude the defense unit is well-positioned. AFJ

SCOTT HAMILTON is an aerospace consultant at Leeham Co. (www.leeham.net.)